By Hosea Kili, Group Managing Director, CPF

The government will be presenting its proposed budget for the year 2017/18 in the coming weeks and many Kenyans will be eager to see the policies government will put in place to spur economic growth. According to the 2015 published RBA Industry Report, the pension industry had Ksh. 814.11Billion in assets under management and reports project thatby close of 2016, the industry will boast of approximately Ksh.1 Trillion in assets under management, a 25 percent growth in value and almost twice the size of the Insurance Industry Investments (Q2, IRA Industry Report, Ksh. 485.27 Bn). The pension industry contribution to the country’s economic growth is therefore significant and therefore important in developing and implementing policies that catalyze penetration and inculcate a saving culture.

Current statistics show that approximately18.2 percent of the formal working population actively save towards their retirement while the informal sector lags behind in spite of innovative solutions such as the mbao pension plan and the CPF M-pension designed to target micro savings.In 2016, the banking sector experienced perhaps its most challenging year yet following a review of the Central Bank lending Rates and the requirement to review and realign their business models in view of those changes. This has in turn led the banks to implement staff rationalization, downsizing/rightsizing programs resulting in a significant increase in overall unemployment levels in the country. That notwithstanding the current harsh economic times hasalso eroded the purchasing power of the lower and middle class to the point where they need to access their savings to stay afloat.

The foregoing puts a lot of pressure on the government especially from the social security perspective, which is not limited tojust providing retirement benefits but health benefits, maternity protection, employment injury and disease protection (workers’ compensation), survivors’ benefits, disability coverage, family benefits, and unemployment protection in line with ILO convention No. 102 of 1952. With 42% of the population currently living below the poverty line, and low penetration levels, a growing gap in income inequality,high levels of dependency, and a weakened social fabric across the country, leaders at all levels of our society have an enormous task ahead to address the myriad of challenges that Kenyans face today.

Globalization has necessitated the need to realign the pension sector to factor the changing ecosystem within the job market where employers are engaging employees on shorter contract terms and on project need basis. For the employee this negates the practicality of formal retirement schemes and in addition to this, the investment vehicles adopted by retirement schemes cannot maximize investment returns. Policy makers should therefore consider a framework in which contributors to pension schemes can choose their investment vehicles based on their risk appetite and capacity. Such new policies should ultimately be geared towards encouraging workers in both formal and informal sectors to contribute to pension schemes to save for their retirement.

While the government seeks to increase its tax base, consideration should be made to lower the taxes currently being paid by retirees. Currently, lumpsum payments are tax exempt up to Ksh. 60,000 (per year contributed) and monthly pension tax-exempt limit is Ksh. 25,000. Increasing these thresholds will increase the capacity of the retired to make meaningful investment with their funds and thus contribute to economic growth and development; while the government achieves its overriding objective of ensuring social security for all as provided for under the constitution.

The move by government last year to allow the set up of post-retirement medical schemes was indeed a commendable and a progressive move. In addition to this development,Pension funds were allowed to invest up to 10 percent of their portfolio in private equity and venture capital funds licensed by the Capital Markets Authority (CMA) and more recently, participate in the derivatives market with a view to generate higher returns for pension schemes, which is ultimately passed on to the pensioners.
Taking cognizance of the current budget deficit, it is paramount for policy makers to consider adopting measures that promote investment into home grown investment vehicles by pension funds. There is also dire need to revive industries that were left to collapse in the past, and encourage through a well laid out incentives policy, the setting up of new industries in the country. Only then can we bridge the growing gap of income inequality and youth unemployment in the country.

March 23, 2013

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May 31, 2013

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